Merrill Fires 2 For Avoiding Enron Inquiry

By PATRICK McGEEHAN and DAVID BARBOZA

Published: September 19, 2002

Merrill Lynch & Company said yesterday that it had dismissed two senior executives, one of whom had been in the running to be its next chief executive, because they refused to cooperate with a federal investigation into the financing of Enron.

Thomas W. Davis, a vice chairman, and Schuyler Tilney, an investment banker in Houston, were dismissed for refusing to provide information to investigators from the Justice Department and the Securities and Exchange Commission, Merrill said. The firm said it did not have any evidence that either man had done anything wrong other than violating the firm's requirement that its employees cooperate with regulators and prosecutors.

The federal investigators are looking into some unusual transactions in 1999 that involved Merrill and helped Enron to book quick profits. Merrill acquired a Nigerian barge from Enron in late 1999, and the two companies completed a complex energy trade in the final days of the year.

Investigators from the F.B.I. and the S.E.C. recently interviewed several former Enron employees in Houston about the power deal, which helped the company book a $60 million profit at the end of 1999.

Merrill also helped create a limited partnership called LJM2 that allowed Enron to keep some debt off its balance sheet. Mr. Davis and Mr. Tilney were among 96 Merrill employees who invested about $16 million of their own money in LJM2. Investigators say they think the partnership, which a Merrill private equity sales team had helped raise about $265 million for, may have helped mask Enron's true financial condition and precipitated its downfall.

Merrill had placed Mr. Tilney, 46, on paid leave in July after he refused to testify before a Congressional panel investigating Merrill's dealings with Enron. Mr. Tilney, a friend of Andrew S. Fastow, Enron's former chief financial officer, was a crucial Merrill contact with Enron in recent years. Lawyers for each man said yesterday that their clients had done nothing wrong.

''We're seeing a more sustained pattern on Wall Street where top brass is moving to distance themselves from employees who are unwilling to usher in change quickly,'' said Henry McVey, an analyst with Morgan Stanley.

The dismissal of Mr. Davis, 49, was the more surprising of the two. He ran Merrill's investment banking operations until last year and had been a contender to be president and succeed David H. Komansky as chairman and chief executive. But after E. Stanley O'Neal won that race, he quickly moved Mr. Davis to a vice chairman's role. In May, Mr. Davis said he would retire from Merrill in November after 25 years with the firm.

Mr. Davis could not be reached for comment. His lawyer, Tom Fitzpatrick, said that he had advised Mr. Davis not to cooperate in what he called ''the post-Enron-collapse environment in which legitimate transactions are being called shams.''

''In my view as a lawyer, in this environment, caution is mandated,'' Mr. Fitzpatrick said. ''As the Supreme Court has said, one of the Fifth Amendment's purposes is to protect the innocent. Tom Davis is innocent of any wrongdoing, but it's a different environment.''

People close to Merrill said that Mr. Davis's refusal to cooperate was frustrating Mr. O'Neal and Mr. Komansky, who want to be seen in Washington as cooperative. Several other Merrill executives have been cooperating with the investigations, these people said.

Mr. Davis's refusal could cost him a large sum that he would have received upon retirement. Merrill, like other Wall Street firms, pays much of the annual bonuses that go to investment bankers in the form of company stock that vests over time.

In 2001, Mr. Davis received $1.35 million in salary and bonus and $6.4 million in restricted stock. When Merrill filed its last proxy statement, in February, Mr. Davis owned about 485,000 shares of Merrill stock.

Mr. Fitzpatrick declined to discuss the terms of Mr. Davis's departure. He said Merrill had placed Mr. Davis on leave for a few days, then dismissed him.

''Merrill always takes the position that if you don't testify, you're out,'' Mr. Fitzpatrick said.

Robert Trout, Mr. Tilney's lawyer in Washington, said his client's position had not changed since the Senate panel hearings.

''Mr. Tilney did nothing wrong,'' Mr. Trout said. ''There are no new facts. Merrill Lynch has consistently stated that its employees did nothing improper in their dealings with Enron.''

Merrill officials have insisted that the company's dealings with Enron were entirely proper. The company has said that Mr. Tilney cooperated with the company's internal investigation and, for a time, with investigators from the Senate Permanent Subcommittee on Investigations.

But after Mr. Tilney's lawyer was informed that the Justice Department was investigating Enron's deals with Merrill Lynch, he advised Mr. Tilney not to testify.

On July 30, Mr. Tilney invoked his Fifth Amendment right and refused to testify before the Senate committee examining deals between Enron and Merrill. Merrill said today, however, that the company had decided to dismiss Mr. Tilney for continuing to refuse to cooperate with investigators. The company's policy requires employees to cooperate with government investigations.